Wednesday, January 28, 2015

There is plenty of nasty stuff that happens on university campuses - so Sabrina Rubin Erderly wrote a story about a rape at University of Virginia that almost certainly did not happen.

She wrote it because she was ideologically committed to the idea that it did happen.

And in so doing she set back her own cause by a decade.

--

There are plenty of abuses at multi-level marketing schemes. I have seen a few.

So Bill Ackman picks on what is probably the straightest MLM and bluntly makes up stories. In the first presentation Shane Dinneen (Ackman's staff member) got up and said that there may not be a single legitimate consumer of Herbalife products anywhere on the planet.

I promise you they are really easy to find. Daily consumers.

He did this after months of "research" which can only be like Sabrina Rubin Erderly's research - research to get your pre-determined opinion confirmed. Easily falsified research.

At some stage the anti-MLM campaigners will need to distance themselves from Bill Ackman's false research.

Note that this is UBS Group on behalf of bank and trading companies and not on behalf of their asset management companies.

Bluntly there is no way that the banks are holding that much Herbalife stock (over 6 percent of the company) unhedged. That is not what banks do. [Even Michelle Celarier - a reliable Ackman shill - has tweeted that UBS holds it as part of its market making.]

So UBS hold the stock and they have entered a total return swap or similar with some undisclosed party. I have my guesses as to who (but that is for a later post).

And it likely that the stock they hold they have in turned lent to an investment bank (which I will call Bank A) which wrote the put options to Mr Ackman. Bank A needs to borrow the stock because they need to be short the stock for the purpose of hedging the options they wrote to Mr Ackman.

--

The new holding was disclosed under rule 13g which is only for passive holdings. (Activist actions such as trying to influence the board are prohibited if you file on 13g rather than 13d.)

As the stock went up he restructured his position - some short, some puts.

In February 2014 he said that his position was much bigger than originally. To quote:

“We actually now have a much larger position notionally than we had initially. If it were to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation.”

We also have an idea of where his break even currently is. Recently he told Reuters this:

"We shorted it at $47 but because of option premium, borrowing costs, dividends, investigative expenses, our break even is around $31, $32,"

You can do the maths. If it was a billion dollar position at $47 per share (and we know it was at least that) he was originally short 21.3 million shares.

His break even is now say $31.50 per share and he will make more money than originally - which means he is short at least 32 million shares (which produces the same result) and probably more than 40 million shares (which is what is required to make this a "much larger" position than originally.

My figuring is that Ackmans short plus put position adds up to something greater than 40 million shares. My guess is 42 million.

--

Now Ackman has many followers. There is Whitney Tilson (who is publicly short) and a host of Twitter gliterati who boast about being short. It is a fair guess that in aggregate they are short (say) 3 million shares.

This makes an aggregate short position of 45 million. This includes straight shorts plus puts.

--

The published short position is about 30 million.

As a conclusion we can guess that something like 15 million shares are not delta hedged.

Those puts are issued by someone who is going to take (or has taken) unhedged delivery of 15 million shares.

Given the number of puts exercised on Friday I suspect they have largely taken delivery.

--

Some of those shares are going to be delivered accidentally. The person sold puts in the hope they would not be delivered and when they are delivered they just sell the shares. This creates downward pressure on the stock. I think we saw that on Monday.

Some of those puts are sold by someone willing and able to take delivery. And most importantly wanting to take delivery.

Normally a new large shareholder has to disclose ownership at ten days (and that would be ten days after they take delivery).

And there must be some new fundamental long (or more than one) who sold those puts to Ackman. People sell a few million dollars of premium for speculation - but someone has taken delivery of hundreds of millions of dollars worth of shares - and in my experience they don't do that by accident.

Sunday, January 18, 2015

I have deliberately refrained from writing about Herbalife until the 17 January 2015 option expiry.

We know from public disclosures that Pershing Square (PSQ) had a huge put option position on Herbalife.

There were also a vast number of put options that expired on 17 January.

Here are the outstanding in-the-money put contracts as at market close Friday.

issue

open interest

31.5

HLF150117P00031500

1,174

31.5

HLF150130P00031500

1

32

HLF150117P00032000

974

32

HLF150123P00032000

34

32

HLF150130P00032000

31

32.5

HLF150117P00032500

5,318

32.5

HLF150123P00032500

59

32.5

HLF150130P00032500

26

33

HLF150117P00033000

677

33

HLF150123P00033000

116

33

HLF150130P00033000

137

33.5

HLF150117P00033500

125

33.5

HLF150123P00033500

276

33.5

HLF150130P00033500

12

34

HLF150117P00034000

206

34

HLF150123P00034000

23

34

HLF150130P00034000

13

34.5

HLF150117P00034500

20

34.5

HLF150123P00034500

78

34.5

HLF150130P00034500

63

35

HLF150117P00035000

13,729

35

HLF150123P00035000

79

35

HLF150130P00035000

39

35.5

HLF150117P00035500

168

35.5

HLF150123P00035500

35

36

HLF150117P00036000

2,096

36

HLF150123P00036000

2

36.5

HLF150117P00036500

190

36.5

HLF150123P00036500

2

36.5

HLF150130P00036500

18

37

HLF150117P00037000

481

37

HLF150123P00037000

135

37.5

HLF150117P00037500

7,446

37.5

HLF150123P00037500

248

37.5

HLF150130P00037500

8

38

HLF150117P00038000

119

38

HLF150123P00038000

7

38

HLF150130P00038000

47

38.5

HLF150117P00038500

17

38.5

HLF150123P00038500

41

38.5

HLF150130P00038500

2

39

HLF150117P00039000

22

39

HLF150130P00039000

7

39.5

HLF150117P00039500

25

39.5

HLF150130P00039500

10

40

HLF150117P00040000

20,202

40

HLF150123P00040000

16

40

HLF150130P00040000

6

40.5

HLF150123P00040500

4

41

HLF150123P00041000

3

42.5

HLF150117P00042500

7,563

43

HLF150117P00043000

1

44

HLF150117P00044000

11

44

HLF150123P00044000

11

45

HLF150117P00045000

18,770

47

HLF150117P00047000

21

47

HLF150123P00047000

1

47.5

HLF150117P00047500

9,611

50

HLF150117P00050000

73,611

52

HLF150123P00052000

2

52.5

HLF150117P00052500

27,058

55

HLF150117P00055000

16,754

55

HLF150123P00055000

11

57.5

HLF150117P00057500

7,597

60

HLF150117P00060000

43,836

62.5

HLF150117P00062500

3,173

65

HLF150117P00065000

27,343

67.5

HLF150117P00067500

957

70

HLF150117P00070000

13,127

72.5

HLF150117P00072500

638

75

HLF150117P00075000

1,373

77.5

HLF150117P00077500

184

80

HLF150117P00080000

9,981

82.5

HLF150117P00082500

892

85

HLF150117P00085000

43

87.5

HLF150117P00087500

109

90

HLF150117P00090000

2,329

95

HLF150117P00095000

263

100

HLF150117P00100000

5,276

105

HLF150117P00105000

172

110

HLF150117P00110000

115

115

HLF150117P00115000

51

120

HLF150117P00120000

69

325,520

They add up to 325 thousand contracts outstanding representing 32.5 million shares.

These options expired on Saturday morning and I presume that the stock has been delivered.

The delivery of these options may have a profound effect on the Herbalife share register. These effects will be part of this series. For reference there are less than 82 million basic shares outstanding and about 91 million diluted shares. However basic shares are the right comparable because delivery has to be effected through basic shares outstanding.

To set the record straight, 97% of the Herbalife put options owned by Pershing Square have been extended and have expiration dates up until 2016. The January put options held by Pershing Square have a strike price of $US65 share. Pershing Square may choose to extend, sell or exercise the January put options depending upon market conditions and other factors.

Those in the know have understood that the options expiring on 17 January were not PSQ's options.

PSQ's option position in Herbalife is an off-market position.

I know the contract terms as do many others.

Some of the strikes are very unusual.

They include 44,362 call contracts [which I presume hedge a short position] expiring on 17 April with the very unusual strike price of $69.99. [The contracts represent 100 shares.]

They also include puts expiring 15 May, 11,550 contracts with a $44.50 strike and a further 19,500 contracts with a the unusual $49.99 strike.

There are a further 25 thousand contracts for calls with another $69.99 strike.

I could go on... and on. Ackman's position is well known amongst connected and sophisticated longs.

Moreover like many things that Bill Ackman says he is being cute-with-the-truth. Bill said his "puts" largely didn't expire on 17 January. He however owned a large number of calls that expired - and these calls hedge the oversized short position. For example PSQ carried 4,375 call contracts that expired this weekend with a strike price of $89.90. Presumably these hedged 437,500 short positions.

I wouldn't bother disclosing that I knew details of PSQs unlisted positions except that it is useful in future posts.

John

Post script: If you (like me) believe that Herbalife is a legitimate business and (like me) you believed that the end game was a private equity bid - then I have a puzzle for you.

How could you - knowing the detail of Bill Ackman's position - make a simply humungous amount of money at least partly at the expense of Pershing Square and their clients? Because I assure you some people want to play rope-a-dope with Mr Ackman. [If you think that Carl Icahn has really suddenly become Bill Ackman's bosom buddy then you don't know Carl...]

Secondly: I suspect that this post will cause Pershing Square's office to be quiet and unusually tense on Monday.

Friday, January 16, 2015

Saxo Bank is a retail foreign exchange trading bank. The idea of forex trading as a retail product is mildly offensive any way. [I simply can't see how you can make money doing this in any consistent manner.]

However the (a) lack of systems and (b) depth of the scam is revealed by Saxo's statement after the giant Swiss Franc move today. To quote:

“Due to today’s exceptional market movement in CHF crosses, we have been filling client orders and positions in an extremely illiquid market. Once we are better able to establish true market liquidity, all executed fills will be revisited, and will be revised and amended to more accurate levels. This may result in a worse execution rate than the originally filled level.”

It is of course garbage of the highest order that in the biggest currency movement of recent times there pertained an "extremely illiquid market". If Saxo quoted the wrong price the problem is Saxo's systems.

Instead Saxo is just stealing from its clients. It did a deal and they traded at a rate - and they are rewriting that deal to suit them.

Theft is the right word.

Any regulator that lets Saxo Bank do this is failing it core functions.

Tuesday, January 13, 2015

I was just listening to a November presentation made by United Technologies - a large and very fine American company. Mostly I was listening for the comments on Pratt & Whitney as Bronte has multiple investments in the jet-engine business.

But I was struck with the forthrightness with which Gregory Hayes (now the Chief Executive Officer) discussed earnings manipulation. You can find the transcript here. To quote:

So we'll be able to deliver on the numbers that we had talked about earlier in the year, which essentially was in a range. We started out at $6.55; we're now at $6.75 to $6.85. We'll be right around $6.85 when the year is said and done. Still some puts and takes, some headwinds around currency. But top line looks solid at $65 billion; bottom line looks solid around $6.85.

I'd just point out, tax extenders is not in our numbers for the year. Who knows if we're going to get extenders here in the last couple of weeks of the year. My own view is that if we get extenders, we'll probably just restructure against that benefit or do something else, as opposed to trying to pass along another dime that's probably not going to give anybody much of a benefit. So I think we're done at $6.85.

So if President Obama signs a tax bill they won't reflect that properly in their earnings they will just take a restructuring charge so they don't need to show the earnings to you.

In other words they will create "cookie jar earnings".

Cookie jar earnings were all the rage when I got into this business. Alex Berenson even wrote a book about them. What shareholders wanted was smooth earnings growth regardless of the vagaries of economic cycles - and people created cookie jars and manipulated earnings to show precisely that.

Listening to United Technologies I felt about 15 years younger. What is old is new again.

Saturday, January 3, 2015

I have agreed with and disagreed with Roddy Boyd more than once in the past year. Sometimes I have agreed with him on the analysis but not on the stock. [Insurance scams in particular can take years to unravel - but that does not mean it is not a scam.]

Moreover Roddy wrote the best "narrow" book on the financial crisis. His book on AIG is a gem though extremely narrow focused on one company rather than on the whole global shebang.

Whatever, narrow, deep investigative journalism on financial chicanery is not a highly profitable business. Doing it well is rare.

The Southern Investigative Reporting Foundation (SIRF is Roddy Boyd's baby) is thinly funded - and I think worthy of more. One of his targets has already gone to prison for fraud - and that is reward but not reward enough.

Anyway SIRF has a tip-jar. You know the usual donate-by-Paypal drill.

Tip a little in.

I have.

And if you are an American it is tax deductible. I had to donate out of post tax income.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.